Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. ? Stock Expected Return Standard Deviation ? Beta A 10% 20% 1.0 B 10% 10% 1.0 C 12% 12% 1.4 Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?
A. Portfolio AB has a standard deviation of 20%.
B. Portfolio AB's coefficient of variation is greater than 2.0.
C. Portfolio AB's required return is greater than the required return on Stock A.
D. Portfolio ABC's expected return is 10.66667%.
E. Portfolio ABC has a standard deviation of 20%.
Answer: D
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